Rework Figure 1 assuming a closed economy (net exports equal zero at all levels of income). What is the equilibrium level of real GDP? What is the spending multiplier?

     

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FIGURE I The Equilibrium Level of Real GDP (4) Government (5) Net Exports X) (6) Aggregate Expenditures (AE) (7) Unplanned Change in Inventories (1) (2) Consumption (C) (3) (8) Change in Real GDP Real GDP Investment Spending (G) (Y) $0 $30 $50 $70 $50 $200 -$200 Increase $00 $100 $50 $70 $40 $260 -$160 Increase $20 $170 $50 $70 $30 $320 -$120 Increase $300 $240 $50 $70 $20 $380 -$80 Increase S400 $310 $50 $70 $10 $440 -$40 Increase $50 $380 $50 $70 $0 $500 $0 No change $600 $450 $50 $70 -$10 $560 $40 Decrease $700 $520 $50 $70 -$20 $620 $80 Decrease 700- AE <Y Income Falls 600 Equilibrium 500 AE > Y Income Rises 400 AE 300- 200 100- 145" 100 200 300 400 500 600 700 Real GDP (Y) (dollars) Macroeconomic equilibrium occurs where aggregate expenditures (AE) equal real GDPM. In the graph it is the point where the AE line crosses the 45-degree line, where expenditures and real GDP both equal $500. When aggregate expenditures exceed real GDP (as they do at a real GDP level of $400, for example), real GDP rises to the equilibrium level. When aggregate expenditures are less than real GDP (as they are at a real GDP level of $600, for example), real GDP falls back to the equilibrium level. 0 2013 Cargig Leeming Expenditures (AE) (dollars) FIGURE I The Equilibrium Level of Real GDP (4) Government (5) Net Exports X) (6) Aggregate Expenditures (AE) (7) Unplanned Change in Inventories (1) (2) Consumption (C) (3) (8) Change in Real GDP Real GDP Investment Spending (G) (Y) $0 $30 $50 $70 $50 $200 -$200 Increase $00 $100 $50 $70 $40 $260 -$160 Increase $20 $170 $50 $70 $30 $320 -$120 Increase $300 $240 $50 $70 $20 $380 -$80 Increase S400 $310 $50 $70 $10 $440 -$40 Increase $50 $380 $50 $70 $0 $500 $0 No change $600 $450 $50 $70 -$10 $560 $40 Decrease $700 $520 $50 $70 -$20 $620 $80 Decrease 700- AE <Y Income Falls 600 Equilibrium 500 AE > Y Income Rises 400 AE 300- 200 100- 145" 100 200 300 400 500 600 700 Real GDP (Y) (dollars) Macroeconomic equilibrium occurs where aggregate expenditures (AE) equal real GDPM. In the graph it is the point where the AE line crosses the 45-degree line, where expenditures and real GDP both equal $500. When aggregate expenditures exceed real GDP (as they do at a real GDP level of $400, for example), real GDP rises to the equilibrium level. When aggregate expenditures are less than real GDP (as they are at a real GDP level of $600, for example), real GDP falls back to the equilibrium level. 0 2013 Cargig Leeming Expenditures (AE) (dollars)

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Real GDP Y Consumption C Investment I Government Spending G Net Exports X Aggregate Expenditure... View the full answer